Land Price Diffusion Across Borders: the Case of Germany
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A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Grau, Aaron; Odening, Martin; Ritter, Matthias Working Paper Land price diffusion across borders: The case of Germany FORLand-Working Paper, No. 03 (2018) Provided in Cooperation with: DFG Research Unit 2569 FORLand "Agricultural Land Markets – Efficiency and Regulation", Humboldt-Universität Berlin Suggested Citation: Grau, Aaron; Odening, Martin; Ritter, Matthias (2018) : Land price diffusion across borders: The case of Germany, FORLand-Working Paper, No. 03 (2018), Humboldt- Universität zu Berlin, DFG Research Unit 2569 FORLand "Agricultural Land Markets - Efficiency and Regulation", Berlin, http://dx.doi.org/10.18452/19263 This Version is available at: http://hdl.handle.net/10419/213057 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. 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However, empirical knowledge about the dynamics of agricultural land prices across borders is sparse. Using the German reunification as a natural experiment, we study the effect of the former inner German border on the dynamics of agricultural land prices in East and West Germany. We apply a land price diffusion model with an error correction specification that estimates to what extent agricultural land markets are spatially integrated. A novel feature of our model is its ability to distinguish price diffusion within states and across state borders. We find that local agricultural land markets in Germany are linked by a long-run equilibrium relationship. Spatial market integration, however, does not hold among all counties in our study area. Regarding our main research question, we provide evidence for a persistent border effect given that the fraction of spatially integrated counties is larger within states than across the former border. Moreover, we observe non-significant error correction terms for many counties along the former border. From a policy perspective, it is striking to realize that even 25 years after German reunification, pronounced land price differences persist. It is quite likely that price diffusion through existing borders within the EU would take even more time given language barriers, different administrative procedures for land acquisitions, different tax systems, and information asymmetries between domestic and foreign market participants. Keywords: Agricultural land markets; price diffusion; spatial dependence; border effect JEL codes: Q24, C23 Acknowledgements Financial support from the German Research Foundation (DFG) through Research Unit 2569 “Agricultural Land Markets – Efficiency and Regulation” is gratefully acknowledged. The authors also thank Oberer Gutachterausschuss für Grundstückswerte in Niedersachsen and Gutachter- ausschuss für Grundstückswerte in Sachsen-Anhalt for providing the data used in the analysis. ∗ Aaron Grau, [email protected] ∗∗ Martin Odening, [email protected] ∗∗∗ Matthias Ritter, [email protected] All authors are at Humboldt-Universität zu Berlin, Faculty of Life Sciences, Department of Agricultural Economics, Unter den Linden 6, D-10099 Berlin. Aaron Grau; Martin Odening; Matthias Ritter Land price diffusion across borders: The case of Germany 1 Introduction Recent surges in agricultural land prices and ongoing changes in land use due to urban sprawl, renewable energy production, and growing demands from non-agricultural investors have triggered debates on the effectiveness of existing land market regulations. Although boom and bust cycles are not new to land markets, current changes in the market are considered to result from a new constellation of driving forces. For instance, it is conjectured that the increased demand for land by financial investors has increased land rental and sales prices. These developments have led to demands for stricter regulations of land markets in many countries, including developed countries (cf. Kay et al., 2015). In 2010, the UK Government Office of Science stressed the need to balance competing pressures on land use and to roll out new land use policies (Government Office for Science, 2010). Four years later, Belgium laid the foundation for new land market instruments, such as a land observatory, land bank, and updated preemption rights. Belgium also tightened land market regulations, which had previously been liberal. Likewise, in Germany, the Federal Ministry and the State Ministries of Agriculture currently aim for a broad distribution of land ownership, the prevention of dominant land market positions on the supply and demand side, the capping of land rental and sales prices, prioritizing agricultural use of farmland, and establishing greater transparency for land markets (Bund-Länder-Arbeitsgruppe “Bodenmarktpolitik”, 2015). Although these goals are fairly general, they fall in line with the trend toward stricter land market regulations. The proposed measures envision restricting market access for actors who treat land as an investment asset and do not have farming interests, while simultaneously prioritizing land purchases by farmers and facilitating farm succession and start-ups. Remarkably, it is mainly the new EU Member States, which carry the legacy of weaker land market institutions from their socialist past, that opt for particularly strong regulations (cf. Swinnen et al., 2016). For example, new land market regulations aiming to restrict the purchase of agricultural land by foreigners and non-farmers was released in Slovakia (Lazíková and Bandlerová, 2015). In 2016, Poland passed the Act on the Structuring of the Agricultural System, which postponed exemptions from EU laws regarding the acquisition of land. The bill proposes to stop the sale of state-owned land for the next five years and includes very strict rules on who can sell and buy privately-owned land. The objective of the new law is to ensure that farmland remains in the hands of Polish farmers after the transition period. Bulgaria, Hungary, Latvia, and Lithuania followed suit with regulations directly or indirectly restricting the free movement of capital and freedom of establishment. Most of the aforementioned attempts to regulate land markets have been motivated by the apprehension that in countries with low land price levels, farmers will encounter a drastic price surge unless land markets are protected against demand by foreign and non-agricultural investors. This assumption, however, lacks empirical evidence. Little is known about the spatio- temporal behavior of agricultural land prices and virtually no empirical study exists that investigates the diffusion of agricultural land prices across borders. In other words, we do not know how fast land prices in two neighboring countries with different price levels would converge if there were no restrictions on the acquisition of land. The main objective of this paper is to address this research gap. Our empirical analysis is conducted for West and East Germany, i.e., we study the effect of the former intra-German border on the dynamics of FORLand-Working Paper 03 (2018) - 3 - Aaron Grau; Martin Odening; Matthias Ritter Land price diffusion across borders: The case of Germany agricultural land prices. The German reunification constitutes a natural experiment on the establishment and evolution of land markets that allows us to study market integration. It is well-known that a gap exists between land prices in West and East Germany, but little is known about how this gap evolves over time and if the same land price dynamics prevail in both parts of Germany. After reunification, regions in Western Germany (especially near the former border between West and East Germany) lost their remoteness since they were suddenly situated in the center